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What is deflation? According to dictionary.com,
it is “a fall in the general price level or a contraction of credit and
available money.”

Falling prices. That sounds good, especially if you have set some cash set aside and
are thinking about a major purchase.

But as some additional research
with Google would seem to demonstrate, that would be a naïve and
simple-minded conclusion. According to received wisdom, deflation is a
serious economic disease. As the St. Louis Fed
would have us believe,

While the idea of lower prices may
sound attractive, deflation is a real concern for several reasons. Deflation
discourages spending and investment because consumers, expecting prices to
fall further, delay purchases, preferring instead to save and wait for even
lower prices. Decreased spending, in turn, lowers company sales and profits,
which eventually increases unemployment.

The problem with deflation, then,
is that it feeds on itself, destroying the economy along the way. It is the
macro equivalent of a roach motel:
perilously easy to enter but impossible to leave. The problem, you see, is
that deflation reduces consumption, which reduces production, eventually
shutting down all economic activity.

Because the price of goods is
falling, consumers have an incentive to delay purchases and consumption until
prices fall further, which in turn reduces overall economic activity. Since
this idles the productive capacity, investment also
falls, leading to further reductions in aggregate
demand. This is the deflationary spiral.

... the
economy crosses the black hole’s event horizon: the point of no return,
beyond which deflation feeds on itself. Prices fall in the face of excess
capacity; businesses and individuals become reluctant to borrow, because
falling prices raise the real burden of repayment; with spending sluggish,
the economy becomes increasingly depressed, and prices fall all the faster.

In case you’re not already scared straight, the
deflationary doomsday has already happened in Americawhen (according to
the New York Times) it caused the Great Depression